The Rise of the EPO?

While Bitcoin captures the imagination of millions, another electronic payment mechanism has been slowly gaining momentum without much notice. Unfortunately so, because it holds significant promise. I’m referring to the Electronic Payment Order (EPO).

EPOs are one of a small variety of checks – but without the paper. Originated electronically, EPOs are processed, clear and settle as check payments indistinguishable from images of what once were paper checks. The idea is more than sensible – it’s brilliant!

Consider banks offering check disbursement services; plenty still do. Disbursement files are created (electronically obviously) from corporate clients and sent to their bank. These files are then used to create large numbers of paper checks subsequently mailed to recipients, introducing significant cost and delay. Once received, these same paper checks are captured via RDC or lockbox operations and subsequently destroyed. The image files are then used as the negotiable items. It begs the question, why bother with the paper step at all?

Risk:Like paper checks, EPOs are susceptible to fraud, and as we know all too well, the check payment system isn’t particularly good at mitigating fraud. Thus, EPO risk mitigation needs to be integral to any EPO creation mechanism. Fear not!

One innovator offering electronically originated check-like instruments is VerifyValid. Check makers can create EPOs individually or using CSV origination files. Receivers can either print documents locally (and presumably scan them for deposit) or keep them digital – with a suitable arrangement with their bank. VerifyValid ensures the legitimacy of each item, transmits items securely and eliminates any meaningful risk of duplicate presentment – if the print step is omitted. Admittedly, I’m no fraud expert, but VerifyValid’s approach seems overwhelmingly superior to printing paper checks – despite the FFIEC’s assertions to the contrary. (Am I the only one that thinks their logic has flaws?)

Law:Apparently, regulators can’t decide whether EPOs should be regulated under Reg. CC (like the rest of checks) or under Reg. E (like consumer electronic payments). The crux of the argument against regulating EPOs under check law is that unlike checks, EPOs originate electronically. Really? I find it amusing that there is no similar consternation around the proper regulatory framework governing electronically initiated checks created in the disbursement process mentioned earlier. After all, those payments originated electronically, but existed as paper for a short period of time. The paper check step adds cost and increases risk, but contributes no value whatsoever. A good discussion around EPOs can be found here.

Call me an EPO proponent. Still, I would understand some EPO reluctance on behalf of our highly regulated banks, given the perceived reputational risk. But offering EPO services wouldn’t be the first innovation that began its life on questionable legal footing. Consider Uber. Patently illegal in many cities, Uber courageously challenged the status quo and is winning. Its recent success in California is well documented.

If put to the test, EPOs may gain proper and reasonable legal footing. I hope so. The B2B use case is particularly compelling when combined with “virtual lockbox” solutions. But will there be a courageous bank willing to challenge the status quo?

Thank you for your mention of VerifyValid. I would like to make an important clarification to help make sure readers do not become confused. While VerifyValid uses the Internet as a means of delivery, VerifyValid items are by definition not EPOs because they are designed and intended to be printed. VerifyValid checks are created and authorized online by the payor, delivered via an online notification that leads the payee to a check that they can then, by agreement, print and deposit like any other check. Think of a VerifyValid check as a check sent without an envelope or stamp. It is the payor’s check, but it is the payee’s printer. While we can support a bank’s acceptance of the items electronically (via RDC) this characteristic of the VerifyValid service is optional and at the sole discretion of the bank of deposit. We also provide an option whereby the payee can forward the check for deposit electronically to the bank who then prints the item on behalf of the customer so that they can then accept the deposit conventionally. It may sound a little crazy, but this is the way some banks prefer to operate rather than, as you say, challenging the status quo.

Bob, you have done a great job of outlining the irony of the current legal and regulatory requirements resulting in printing data to paper to create a “check” only to have the information on the paper converted back to data through an imaging process. Like you and many others, I would also love to know what your readers think of the prospect of fully electronic checks.

Tanks for your clarification, Paul. I understand the several deposit method options users of your solution have and hope as banks implement 100% paperless options for clients, the regulators will make reasonable decisions. The path to doing so seems rather straightforward.

The EPO digital check is a compelling solution that for some reason, the FRB has decided to shelve rather than approve the UCC enabling statue. We have developed an EPO solution for the Title Settlement Industry that will be released next month. The business is compelling, but the enrollment of stakeholders is greatly delayed by the FRB’s lack of support.